United States District Court, M.D. Pennsylvania
June 7, 2005.
RITE AID CORPORATION, Plaintiff,
LIBERTY MUTUAL FIRE INSURANCE CO., et al., Defendants.
The opinion of the court was delivered by: YVETTE KANE, District Judge
MEMORANDUM AND ORDER
Before the Court are cross motions for summary judgment. (Doc.
Nos. 70 and 73.) The motions have been fully briefed and are ripe
for disposition. For the reasons that follow, Plaintiff's motion
for summary judgment will be granted in part and denied in part,
and Defendant's motion for summary judgment will be granted in
part and denied in part.
This insurance dispute originated from a February 9, 2001
Demand for Arbitration filed by Beth Kaplan ("Kaplan"), a former
executive officer of Plaintiff Rite Aid Corporation, asserting
numerous claims against Plaintiff. In August 1996, Ms. Kaplan
left her Vice President position with Proctor & Gamble to become
a senior executive in charge of Plaintiff's Cosmetics and
Fragrance Division. According to Kaplan, her decision to sign an
employment contract with Plaintiff was based in part on
information found within Plaintiff's public disclosures, annual
reports, and SEC filings. After two and a half years, Plaintiff became embroiled in stockholder lawsuits
and regulatory investigations regarding certain financial
practices conducted by Plaintiff's management. These financial
irregularities resulted in a $1.6 billion correction to prior
years' earnings, dramatic reduction in Plaintiff's stock price,
and criminal prosecution of members of Plaintiff's management. On
November 12, 1999, Kaplan terminated her employment agreement
with Plaintiff and resigned from the company.
In her Demand for Arbitration, Kaplan alleged, inter alia,
that Plaintiff had negligently or intentionally misrepresented
its financial strength in documents given to her prior to her
employment, thereby fraudulently or negligently inducing her to
take employment with a company financially weaker than
advertised. Kaplan also alleged that the taint of association
with Plaintiff handicapped her ability to secure employment
commensurate with her experience.
Defendant Liberty Mutual issued a Commercial General Liability
policy to Plaintiff for years 1997, 1998, and 1999 ("Policy").
During all times relevant hereto, Plaintiff was also covered by
an Employment Practices Liability Insurance policy issued by
Zurich American Insurance ("Zurich"). By letter dated July 6,
2001, Plaintiff notified Zurich of the arbitration. By letter
dated August 27, 2001, Plaintiff notified Defendant of the
arbitration with Kaplan.
On November 14, 2002, an arbitration panel issued a ruling
awarding Kaplan nearly $5,000,000, plus interest, in damages, but
finding for Plaintiff on Kaplan's claims for pre-employment
misrepresentations and injury to reputation. On January 22, 2003,
Plaintiff and Kaplan entered a confidential settlement agreement.
II. Procedural History
On September 26, 2003, Defendant commenced an action in the
United States District Court for the Northern District of California, seeking declaratory
judgment with respect to potential liability under the Policy. On
October 8, 2003, Plaintiff initiated the instant action against
Defendant, Zurich, and Federal Insurance Company ("Federal
Insurance"), asserting breach of contract and bad faith under the
Pennsylvania Bad Faith statute, 42 Pa. Cons. Stat. Ann. § 8371.
In addition, Plaintiff moved to transfer the California action to
this Court, or in the alternative, dismiss the action. On
December 18, 2003, the California court transferred Defendant's
declaratory judgment action to this Court, whereupon this Court
dismissed the case as unnecessarily duplicative to the instant
On February 11, 2004, Plaintiff filed an amended complaint.
(Doc. No. 29.) On February 15, 2005, Plaintiff filed its instant
motion for summary judgment. (Doc. No. 70.) On February 18, 2005,
Defendant filed its motion for summary judgment. (Doc. No. 73.)
On February 18, 2005 and March 18, 2005, Plaintiff voluntarily
dismissed Zurich and Federal Insurance respectively from this
III. Summary Judgment Standard
Summary judgment is proper where "the pleadings, depositions,
answers to interrogatories, and admissions on file, together with
the affidavits, if any, show that there is no genuine issue as to
any material fact and that the moving party is entitled to a
judgment as a matter of law." Fed.R.Civ.P. 56; White v.
Westinghouse Elec. Co., 862 F.2d 56, 59 (3d Cir. 1988). A
factual dispute is material if it might affect the outcome of the
suit under the applicable law. Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 248 (1986). A factual dispute is genuine only if
there is a sufficient evidentiary basis that would allow a
reasonable fact-finder to return a verdict for the non-moving
party. Id. at 249. The evidence presented must be viewed in the
light most favorable to the non-moving party. Id. "The inquiry
is whether the evidence presents a sufficient disagreement to
require submission to the jury or whether it is so one sided that one party must, as a matter of
law, prevail over the other." Id. This standard does not change
by virtue of cross-motions being presented. United States v.
Hall, 730 F. Supp. 646, 648 (M.D. Pa. 1990).
The moving party has the initial burden of identifying evidence
that it believes shows an absence of a genuine issue of material
fact. Childers v. Joseph, 842 F.2d 689, 694 (3d Cir. 1988).
Once the moving party has shown that there is an absence of
evidence to support the non-moving party's claims, the non-moving
party may not simply sit back and rest on the allegations in the
complaint. Instead, the non-moving party must "go beyond the
pleadings and by [its] own affidavits, or by the depositions,
answers to interrogatories, and admissions on file, designate
specific facts showing that there is a genuine issue for trial."
Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986). The
evidence must be viewed in the light most favorable to the
non-movant. See Groman v. Township of Manalapan, 47 F.3d 628,
633 (3d Cir. 1995). Summary judgment should be granted where a
party "fails to make a showing sufficient to establish the
existence of an element essential to that party's case and on
which that party will bear the burden at trial." Celotex,
477 U.S. at 322.
With respect to the sufficiency of the evidence that the
nonmoving party must provide, a court should grant summary
judgment where the nonmovant's evidence is merely colorable,
conclusory or speculative. Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 249-50 (1986). There must be more than a scintilla of
evidence supporting the nonmoving part and more than some
metaphysical doubt as to the material facts. Id. at 252;
Matsushita Elec. Indus. Co. v. Zenith Radio Corp.,
475 U.S. 574, 586 (1986).
IV. Discussion A. INTERPRETATION OF THE INSURANCE POLICY
Both parties agree that Pennsylvania law governs this
contractual dispute. (Doc. No. 72 at 10, n. 8; Doc. No. 74 at 6.)
It is well-settled that the task of interpreting an insurance
contract falls to the Court. Standard Venetian Blind Co. v. Am.
Empire Ins. Co., 469 A.2d 563, 566 (Pa. 1983). An insurer owes a
duty to defend under a policy when "the allegations in the
complaint against [the insured] could potentially fall within the
coverage of the policy." Air Prods. & Chems. v. Hartford
Accident & Indem. Co., 25 F.3d 177, 179 (3d Cir. 1994) (citing
Gedeon v. State Farm Mut. Auto. Ins. Co., 188 A.2d 320 (Pa.
1963)). This obligation to defend arises whenever the underlying
complaint potentially may come within the coverage of the policy.
Humphreys v. Niagara Fire Ins. Co., 590 A.2d 1267, 1271 (Pa.
Super. 1991). Under Pennsylvania law, "it is not the actual
details of the injury, but the nature of the claim which
determines whether the insurer is required to defend."
Springfield Twp. v. Indemnity Ins. Co. of N. Am., 64 A.2d 761,
763 (Pa. 1949). In determining whether an insurer has a duty to
defend its insured "the factual allegations of the complaint are
taken to be true and the complaint is to be liberally construed
with all doubts as to whether the claims may fall within the
coverage of the policy to be resolved in favor of the insured."
Unionamerica Ins. Co., Ltd. v. J.B. Johnson, 806 A.2d 431,
433-34 (Pa.Super.Ct. 2002) (internal citations omitted). See
also Mark I Restoration SVC v. Assurance Co. of Am.,
248 F. Supp. 2d 397, 400 (E.D. Pa. 2003).
In interpreting the insurance policy, the Court should seek to
ascertain the intent of the parties as manifested by the language
of the written instrument. Standard Venetian Blind Co.,
469 A.2d at 566-67. When the language is clear and unambiguous, the
Court is required to give effect to that language. Id.. "In
construing an insurance policy, unambiguous terms are to be given
their `plain and ordinary meaning.'" St. Paul Fire & Marine Ins. Co. v. Lewis,
935 F.2d 1428, 1431 (3d Cir. 1991) (quoting Pennsylvania Mfrs.
Ass'n Ins. Co. v. Aetna Casualty & Sur. Ins. Co., 233 A.2d 548,
551 (Pa. 1967)). However, "if the policy provision is reasonably
susceptible to more than one interpretation, it is ambiguous."
McMillan v. State Mut. Life Assurance Co., 922 F.2d 1073, 1075
(3d Cir. 1990). "In determining whether a contract is ambiguous,
the court must examine the questionable term or language in the
context of the entire policy and decide whether the contract is
reasonably susceptible of different constructions and capable of
being understood in more than one sense." Reliance Ins. Co. v.
Moessner, 121 F.3d 895, 900 (3d Cir. 1997) (citing Gamble Farm
Inn, Inc. v. Selective Ins. Co., 656 A.2d 142 (Pa.Super.
1. Personal Injury
The policy at issue provides that:
[Defendant] will pay those sums the insured becomes
legally obligated to pay as damages because of
"personal injury" or "advertising injury" to which
this insurance applies. [Defendant] will have the
right and duty to defend [Plaintiff] against any
"suit" seeking those damages. However, [Defendant]
will have no duty to defend [Plaintiff] against any
"suit" seeking damages for "personal injury" or
"advertising injury" to which this insurance does not
(Liberty Mutual CGL Policy for Policy Year 1999, Doc. No. 78,
Exhibit 4, § I(B)(1)(a).) The Policy defines "Personal injury" as
a. "Bodily injury"; b. Injury to the feelings or reputation of a natural
person, except for injury within the definitions of
"bodily injury" or "property damage"; and
c. Injury to intangible property sustained by an
organization as the result of a "covered offense".
(Liberty Mutual CGL Policy for Policy Year 1999, Doc. No. 78,
Exhibit 4, General Amendatory Endorsement at 2.) In her demand
for arbitration, Kaplan asserted, inter alia, that Plaintiff
"made false and misleading representations to Kaplan, including,
without limitation, representations as to its financial health in
its public filings, and direct representations to her such as the
representation that Rite Aid was the most profitable drug store
in the industry" before she was hired. (Doc. No. 70, Exhibit 1,
¶¶ 78 and 86.) Kaplan further asserted that Plaintiff made these
representations "through its senior officers with the intention
and expectation that Kaplan [would] rely on them in making her
decision to accept employment with Rite Aid," causing her "severe
injury to her career and income potential." (Id., ¶¶ 80-91.) In
her demand, Kaplan explained that, allegedly, "as one of
America's most promising and successful young executives . . .
her status [is now] tainted through the guilt-by-association that
accompanies prior service at a company engaged in the management
and accounting practices with which the Rite Aid name is now
associated in the executive employment marketplace." (Id., ¶
4.) These claims for injury to reputation fall squarely within
the policy's definition of "personal injury." (Doc. No. 78,
Exhibit 4, Amendment page 2 of 13.)
2. The Employment-Related Practices Exclusion Defendant argues that the policy does not cover Kaplan's claim
of damage to her personal reputation because her claims fall
within the policy's employment-related practices exclusion. (Doc.
No. 74 at 6-9.) The Employment-Related Practices exclusion states
that the insurance policy does not apply to:
"Personal injury" to:
1. A person arising out of any:
(a) Refusal to employ that person;
(b) Termination of that person's employment; or
(c) Employment-related practices, policies, acts or
omissions, such as coercion, demotion, evaluation,
reassignment, discipline, defamation, harassment,
humiliation or discrimination directed at that
* * *
This exclusion applies:
1. Whether the insured may be liable as an employer
or in any other capacity; and
2. To any obligation to share damages with or repay
someone else who must pay damages because of the
(Employment-Related Practices Exclusion, Doc. No. 70, Exhibit
11.) Defendant contends that the exclusion applies to Kaplan's
personal reputation claim because Kaplan's alleged injury arose
from incorrect financial statements used by Plaintiff to
fraudulently induce Kaplan into entering employment with
Plaintiff. (Doc. No. 74 at 7-8.) Although these actions occurred
prior to Kaplan's actual employment, Defendant would have the
Court broadly interpret the phrase "employment-related practices, policies, acts or omissions" as encompassing the above
alleged fraudulent inducement. (Id. at 8-9.) According to
Defendant, Plaintiff's misrepresentations of its financial
strength, to the extent that they were used to induce Kaplan into
accepting employment, constituted "wrongful employment acts" that
would fall within the aforementioned exclusion. (Id. at 8.)
This matter is one of first impression for this Court, as no
Pennsylvania court has yet decided in a published opinion whether
an employer's conduct prior to employment can constitute
"employment-related practices, policies, acts or omissions."
(Doc. No. 70, Exhibit 11.) The Court looks first to the language
of the policy itself. When construing the language of a contract,
a court should give meaning to all its words and phrases and
adopt a construction that avoids surplusage. Tenos v. State Farm
Ins. Co., 716 A.2d 626, 631 (Pa. Super Ct. 1998) "([Pennsylvania
law] does not permit words in a contract to be treated as
surplusage"). The exclusion at issue consists of three parts;
claims arising out of (1) refusal to employ, (2) termination of
employment, or (3) employment-related practices, policies, acts
or omissions. (Doc. No. 70, Exhibit 11.) The first provision
deals with a specific act prior to employment and the second
provision concerns a specific act at the very end of employment.
If the "employment-related practices" phrase of the third
provision was to be read as broadly as Defendants argue it
should, then the third provision would naturally encompass the
first two, making these prior provisions superfluous. The
policy's separation of these provisions indicates that the
"employment-related practices" language of the third provision
was not intended to encompass all acts that are tenuously
associated with employment. The Court's interpretation is
bolstered by the types of acts actually listed in the third
provision, such as demotion and reassignment, which would either
typically or exclusively occur during the employment tenure,
not prior to employment. Rather, the exclusion distinguishes prior employment acts from provision
three by addressing such acts separately. This separate provision
clearly defines what prior employment acts are covered under the
exclusion; viz. refusals to employ. (Doc. No. 70, Exhibit 11.)
Had Defendant intended to include the act of fraudulent
inducement within the third provision or within the exclusion
generally, it could have drafted the policy to do so. Because it
did not, Kaplan's claims for injury to her reputation are not
excluded from the Policy by the Employment-Related Practices
3. Other Insurance
Under the terms of the Policy, "[t]his insurance is primary
except when [section] b. below applies." (Doc. No. 78, Exhibit 4,
§ IV(4)(a).) Subsection b applies exclusively to insurance for
"fire, extended coverage, builder's risk, installation risk or
similar coverage to `your work' . . . fire insurance for premises
rented to you . . . and loss aris[ing] out of the maintenance or
use of aircraft, `autos' or watercraft. . . ." (Id., §
IV(4)(b).) As the instant matter does not fall within subsection
b's listed exceptions, the Policy is a primary insurance policy.
In the event that two primary policies are triggered, "[t]hen
[Defendant] will share with all that other insurance [sic],"
contributing in equal shares, "until it has paid its applicable
limit of insurance or none of the loss remains, whichever comes
first." (Id., § IV(4) (a-c).) However, under the General
Amendatory Endorsement, the Policy:
does not apply to any portion of a loss for which the
insured has available any other valid and collectable
insurance, whether primary, excess, contingent, or on
any other basis, unless such other insurance was
specifically purchased by the insured to apply in
excess of this policy.
(Id., General Amendatory Endorsement, § N(1).) The Zurich policy was also intended to be the primary insurance
policy with regard to covered claims. (Doc. No 78, Exhibit 5.)
Under the Zurich policy, Plaintiff had a "self-insured retention"
and was "self-insured" up to the first million dollars in cost of
In the present action, Plaintiff seeks to recover approximately
$1.6 million from Defendant incurred in defending the Kaplan
claims, plus pre-judgment and post-judgment interest. (Doc. No.
122.) Plaintiff asserts that Defendant is responsible for the
first million dollars of Plaintiff's costs of defense, plus one
half of the costs in excess of $1 million, which is equal to
$1,559,925. (Id.) Defendant asserts that because Plaintiff's
cost of defense was covered by the Zurich policy, it has no duty
to defend whatsoever. (Doc. No. 104 at 14.)
Under Pennsylvania law, an insurer's "duty to defend is broader
than the duty to indemnify, because a duty to defend arises
whenever an underlying complaint may potentially come within the
insurance coverage. . . . If a single allegation of a complaint
is potentially covered by a policy, an insurer has an obligation
to defend its insured against all claims until there is no
possibility of recovery for a covered claim." CAT Internet
Servs. v. Providence Wash. Ins. Co., 333 F.3d 138, 141 (3d Cir.
2002). Because the pre-employment misrepresentation claims fell
within the Policy, Defendant had a duty to pay for Plaintiff's
defense until those claims were rejected by the arbitration
However, under the clear language of the General Amendatory
Endorsement, the Policy does not cover expenses for "which the
insured has available any other valid and collectable insurance"
unless the other insurance was purchased to apply in excess of
the Policy. (Doc. No. 78, Exhibit 4, General Amendatory
Endorsement, § N(1).) As Defendant admits, a self-insured
retention cannot constitute "other insurance."*fn3 See General Star
National Insurance Corp. v. World Oil Co., 973 F. Supp. 943, 949
(C.D. Cal. 1997) (holding that a self-insured retention
"effectively transforms what is labeled a primary policy into an
excess policy covering only amounts in excess of the amount of
the self-insured retention"). Accordingly, because Plaintiff did
not have any "other insurance" for the first one million dollars
in defense costs that were used in defending an action, at least
in part, concerning a covered claim, Defendant is liable for the
first million dollars in defense expenses. On the other hand,
because the Zurich policy covered defense expenses in excess of
one million dollars, under the clear language of the General
Amendatory Endorsement, Defendant is not liable for the amount
above one million covered by Zurich.
Accordingly, Defendant had a duty to defend Plaintiff in the
Kaplan arbitration under the clear language of the policy, but is
liable for only the first one million dollars in defense costs.
B. COLLATERAL AND JUDICIAL ESTOPPEL
Defendant next claims that Plaintiff should be "estopped from
denying its previous position in the Zurich arbitration." (Doc.
No. 74, at 9.) As Defendant correctly notes, to collaterally
estop another party from asserting a position inconsistent with
one previously taken under Pennsylvania law, the following four
requirements must be satisfied:
(1) the issue decided in the prior adjudication must
be identical with the one presented in the later
2) there must have been a final judgment on the
merits; 3) the party against whom collateral estoppel is
asserted must have been a party or in privity with
the party to the prior adjudication; and
4) the party against whom collateral estoppel is
asserted must have had a full and fair opportunity to
litigate the issue in question in the prior
Schroeder v. Acceleration Life Ins. Co., 972 F.2d 41
, 45 (3d
Cir. 1992) (citing Kelly v. Warminster Township. Bd. of
Supervisors, 512 F.Supp. 658 (E.D. Pa. 1981)). "Under
Pennsylvania law, arbitration proceedings and their findings are
considered final judgments for the purposes of collateral
estoppel." Witkowski v. Welch, 173 F.3d 192
, 199 (3d Cir.
The doctrine of judicial estoppel prevents litigants from
"playing fast and loose with the courts" by arguing a position
inconsistent with one previously asserted. New Hampshire v.
Maine, 532 U.S. 742, 749-50 (2001) (internal quotations
omitted). Judicial estoppel requires a showing that:
(1) the party's later position was "clearly
inconsistent" with its earlier position;
(2) the party had succeeded in persuading a court to
accept the earlier position, so that judicial
acceptance of an inconsistent position in a later
proceeding would create "the perception that either
the first or the second court was misled;" and
(3) the party seeking to assert an inconsistent
position would derive an unfair advantage or impose
an unfair detriment on the opposing party if not
New Hampshire, 532 U.S. at 751. Judicial estoppel also applies
to arbitrations. Thompson v. Anderson, 632 A.2d 1349, 1351
Defendant asserts that Plaintiff should be collaterally or
judicially estopped from taking the position that Kaplan's claims
for fraudulent inducement are not excluded under the policy's "employment-related practices" exclusion because Plaintiff
originally argued that these claims constituted "wrongful
employment acts" under the Zurich policy. (Doc. No. 74 at 9-10.)
As evidence, Defendant compares four assertions made by Plaintiff
in a pre-hearing arbitration brief to corresponding responses to
Defendant's request for admissions in the instant
action.*fn4 (Docs. Nos. 74 and 104.) Plaintiff responds that
the claims discussed during the Zurich arbitration occurred
during Kaplan's employment and did not include this
pre-employment claim. (Doc. No. 82, at 8-9.)
Regardless of whether the Zurich arbitration dealt with all of
Kaplan's claims or merely some, Plaintiff's early position with
regard to "wrongful employment acts" under the Zurich policy is
not inconsistent with its current position as to the
"employment-related practices" exclusion under Defendant's
policy. The term "Wrongful Employment Act" is defined by the
Zurich policy as:
any error, misstatement, misleading statement, act,
omission, neglect, or breach of duty actually or
allegedly committed or attempted by the
[Plaintiff] . . ., in connection with any actual,
alleged or constructive wrongful dismissal,
discharge or termination of employment; breach of
any oral, written or implied employment contract or
quasi-employment contract; employment-related
misrepresentation; violation of any federal, state,
or local statute, regulation, ordinance, common law
or public policy concerning employment or
discrimination in employment; sexual or other illegal
workplace harassment (including without limitation
offensive, intimidating, coercive or unwelcome
conduct, advances, contact or communications);
wrongful failure to employ or promote; wrongful
discipline; wrongful deprivation of a career
opportunity; wrongful demotion or adverse change in
the terms, conditions or status of employment;
failure to grant tenure; failure to adopt adequate
workplace or employment policies and procedures;
illegal retaliatory treatment of employees; negligent
hiring; negligent evaluation of employees; wrongful reference;
employment-related invasion of privacy;
employment-related defamation; employment-related
wrongful infliction of emotional distress; or other
(Zurich American Employment Practices Liability Insurance Policy
1999, Doc. No. 78, Exhibit 5, § III(O).) This provision is
significantly different from and encompasses much more than the
"employment-related practices" exclusion contained within
Defendant's policy and discussed above. For example, a "negligent
hiring" is clearly within the terms of a "wrongful employment
act" whereas, for reasons discussed above, such a claim would not
fall within Defendant's "employment-related practices"
Moreover, "wrongful employment act" is a term
of art defined in an entirely separate insurance contract.
Defendant's policy makes no reference to nor incorporates this
definition within the "employment-related practices" exclusion.
Insurance policies are highly technical documents, and an
argument that a claim was a "wrongful employment act" as defined
by one policy is not necessarily or clearly inconsistent with
arguing that the same claim is not an "employment-related
practice?, polic[y], act? or omission?" within the meaning of
a completely different policy. Similarly, a finding that the
claim is covered by the Zurich policy, does not necessarily mean
that the same claim must be excluded by Defendant's policy.
Accordingly, the Court finds that Plaintiff should not be
collaterally or judicially estopped from arguing that Defendant's
policy covers the Kaplan claims.
C. LATE NOTICE
Under Pennsylvania law, where the insured provides late notice
of the potential claim, the insurance company will be relieved of its responsibilities under
the policy only if it can prove actual prejudice resulting from
the untimely notice. Trustees of the Univ. of Pa. v. Lexington
Ins. Co., 815 F.2d 890, 896 (3d Cir. 1987); Brakeman v. Potomac
Ins. Co., 371 A.2d 193, 195-99 (Pa. 1977). In Brakeman, the
Pennsylvania Supreme Court held that late notice will only
release an insurance company from its obligations under a policy
if it can prove that the notice provision was breached and that
the breach resulted in actual prejudice to its position.
371 A.2d at 195-99. In Trustees of University of Pennsylvania v.
Lexington Ins. Co., the Third Circuit Court of Appeals explained
the purpose of the prejudice requirement is to allow
an insurer to refuse payment only if its procedural
handicap has led to disadvantageous, substantive
results in other words, if the insured's violation
of its contract has proximately caused its insurer
damages. As a New Jersey Superior Court decision has
cogently explained, courts have required a showing
not only of the loss of substantial defense
opportunities but also of a "likelihood of success"
in defending liability or damages if those
opportunities had been available. Morales v.
National Grange Mut. Ins. Co., 176 N.J. Super. 347
(1980). . . . The mere interference with [the
insurance company's] right to "associate" in the
defense of the claim is too amorphous and cannot
itself constitute prejudice unless [the insurance
company] can demonstrate that earlier notice would
probably have led to a more advantageous result.
815 F.2d at 898-899.
Under the policy:
(a) [Plaintiff] must see to it that [Defendant is]
notified as soon as practicable of an "occurrence" or
an offense which may result in a claim.
* * *
(b) If a claim is made or a "suit" is brought against
any insured, [Plaintiff] must: (1) Immediately record the specifics of the claim or
"suit" and the date received; and
(2) Notify [Defendant] as soon as practicable.
[Plaintiff] must see to it that [Defendant]
receive[s] written notice of the claim or "suit" as
soon as practicable.
(Doc. No. 78, Exhibit 4, § IV (2).) The policy defines "suit" as
"a civil proceeding in which damages . . . to which this
insurance applies are alleged" including arbitration proceedings.
(Id., Exhibit 4, § V (16).) However, the policy does not
specify whether "a claim," under the notice section, is any claim
made against the insured or only those claims that could trigger
coverage under the insurance policy.
In the instant matter, Plaintiff received notice of Kaplan's
employment agreement claims by letter dated November 18, 1999.
(Doc. No. 78, Exhibit 18.) On January 28, 2000, Plaintiff
received a courtesy copy of Kaplan's arbitration demand, prior to
Kaplan formally filing an Arbitration Demand on February 9, 2001.
(Id., Exhibits 20-21.) Plaintiff notified Zurich on July 6,
2001 and Defendant on August 27, 2001. (Id., Exhibits 23-24.)
Therefore, Plaintiff complied with the Policy's notice
requirement 21 months after receiving Kaplan's initial letter.
Plaintiff accurately points out that Kaplan's November 18, 1999
letter did not assert her claim for injury to her personal
reputation or any claim that might have been covered under the
Policy. (Doc. No. 82, at 11 n. 3.) Kaplan first asserted this
claim in her Arbitration Demand, which Plaintiff received only
seven months prior to notifying Defendant. However, as stated
above, the Policy's notice provision does not define "a claim" as
only those claims that might be covered under the Policy. The
notice provision can be read as to require an insured to give
notice when any claim is asserted against it. This reading of the
provision makes sense considering that actions, which may not
initially assert claims that are covered, often can grow to include covered claims prior to trial/arbitration, as in
the present case. However, regardless of how one interprets the
meaning of the term "claim" in the notice provision of the
Policy, Plaintiff's seven-month delay before notifying Defendant
is long enough by itself to constitute a breach of the provision.
Plaintiff provides no answer as to why it delayed so long in
notifying Defendant of Kaplan's suit, nor why this delay was
"practicable" under the circumstances.
Nonetheless, although the Court finds that Plaintiff breached
the notice provision, the Court does not find any evidence that
this breach resulted in actual prejudice to Defendant's position
during arbitration. Brakeman, 371 A.2d at 197-99. Kaplan's
depositions were held on February 20-21, 2002 and the case was
heard in arbitration on March 12, 2002, well after Defendant was
notified of the Arbitration Demand. (Defendant's Claims
Specialist's Notes, Doc. No. 78, Exhibit 27.) Moreover, Plaintiff
prevailed on the reputation claims at arbitration. (Arbitration
Award, Doc. No. 78, Exhibit 31.)
Defendant initially argues that it was prejudiced by
Plaintiff's delay as a matter of law, citing Metal Bank of
America, Inc. v. Ins. Co. of N. America, 520 A.2d 493 (Pa.
Super. 1987). However, Defendant's reliance upon this case is
misplaced. In Metal Bank of America, the Pennsylvania court
found that the insurance carrier had been prejudiced as a matter
of law when the insured waited nine years after the event
occurred to notify the insurer. 520 A.2d at.494-96. The court
found that, because of the extensive delay, "[t]he insurers did
not have an opportunity to investigate the facts or participate
in the defense of the action against Metal Bank[,] . . . a
settlement was already a fait accompli, and the insurers, who
were being called upon to provide funds for the settlement had no
opportunity to control the proceedings or in any way protect
themselves." Id. at 359-360. In the instant matter, Defendant proffers no evidence that Plaintiff's
delay caused witnesses to be unavailable, evidence to be
destroyed, or otherwise prevented or delayed Defendant from
investigating Kaplan's claims. Moreover, for reasons discussed
more fully below, the delay did not prevent Defendant from
participating in the defense of the action or in settlement
negotiations. Accordingly, the Court finds that Plaintiff's delay
in providing notice did not prejudice Defendant as a matter of
Alternatively, Defendant argues that it was actually prejudiced
by Plaintiff's delay and "lack of cooperation in providing
[Defendant] with enough information to come `up to speed' on the
case," causing Defendant to "lose its opportunity to effect an
early resolution to this matter." (Doc. No. 74, at 23.) Defendant
cites only to the November 16, 2004 deposition of Kaplan's
attorney, Jay Berke, in which attorney Berke explained that he
would have involved Defendant in more settlement discussions, but
felt Defendant did not have a proper grasp of the issues. (Doc.
No. 78, Exhibit 7.) Although this failure to "control and
contribute to the defense" did not prejudice Defendant with
regard to the arbitration award, since Kaplan lost on her
reputation claims, Defendant argues that if it had been properly
notified and if Plaintiff's defense counsel had more fully
cooperated with Defendant during the lead up to trial, Defendant
may have been able to convince Kaplan to settle early, mitigating
the cost of defense. (Doc. No. 74, at 23.) However, this argument
is speculative and not supported by the evidence.
First, Defendant had no right under the Policy to choose
defense counsel in the Kaplan arbitration. (Liberty Mutual CGL
Policy for Policy Year 1999, Doc. No. 78, Exhibit 4.) Therefore,
earlier notice would not have allowed Defendant to choose or
control Plaintiff's defense counsel. Second, the record
demonstrates that Defendant was aware of pre-trial negotiations,
but rejected offers because Defendant felt, as it feels now, that Kaplan's
claims did not fall under the Policy.*fn6 (Doc. No. 83,
Exhibits 17-21.) Defendant puts forth no evidence, and the Court
finds none, to suggest that it would have settled had it been
notified seven months earlier. Accordingly, the Court finds that
Defendant did not suffer prejudice because of the delay and
Defendant's motion for summary judgment upon this claim must be
denied. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-50.
D. BAD FAITH
In Count II of its Amended Complaint (Doc. No. 29), Plaintiff
asserts a claim against Defendant under Pennsylvania's "bad
faith" statute, which provides that:
In an action arising under an insurance policy, if
the court finds that the insurer has acted in bad faith toward the insured,
the court may take all of the following actions:
(1) Award interest on the amount of the claim from
the date the claim was made by the insured in an
amount equal to the prime rate of interest plus 3%.
(2) Award punitive damages against the insurer.
(3) Assess court costs and attorney fees against the
42 PA. CONS. STAT. ANN. § 8371. Bad faith is "any frivolous or
unfounded refusal to pay proceeds of a policy, and that such
conduct imports a dishonest purpose and means a breach of a known
duty . . . through some motive of self-interest or ill will."
UPMC Health Sys. v. Metro. Life Ins. Co., 391 F.3d 497, 505 (3d
Cir. 2004) (quoting Terletsky v. Prudential Prop. & Cas. Ins.
Co., 649 A.2d 680, 688 (Pa.Super.Ct. 1994)) (internal
quotation marks omitted). In order to recover under a claim of
bad faith, Plaintiff must "show  that the defendant did not
have a reasonable basis for denying benefits under the policy and
 that defendant knew or recklessly disregarded its lack of
reasonable basis in denying the claim." Id. The essence of a
bad faith claim is "the unreasonable and intentional (or
reckless) denial of benefits." UPMC Health Sys.,
391 F.3d at 506 (citing Cresswell v. Nat'l Mut. Cas. Ins. Co.,
820 A.2d 172
, 180 (Pa.Super.Ct. 2003)).
Although the Court does not agree with Defendant's
interpretation of the policy language at issue, Plaintiff offers
no evidence, and the Court finds none, to indicate that
Defendant's denial was reckless or unreasonable. Moreover,
contrary to Plaintiff's assertions, Defendant's initiation of the
declaratory action in California does not, by itself, indicate
bad faith. Accordingly, Defendant's motion for summary judgment
regarding Plaintiff's bad faith claim will be granted and Count
II of Plaintiff's Amended Complaint (Doc. No. 29) will be dismissed.
Lastly, there appears to be a dispute of material facts with
regard to Plaintiff's actual defense costs. Plaintiff alleges
that its reasonable costs to defend itself in the Kaplan matter
were $2.1 million. (Doc. No. 122.) However, Plaintiff has not
provided the Court with any evidence to explain how this sum was
calculated or that the costs incurred were reasonable. Moreover,
Defendant questions this figure and Plaintiff's damages in
general. (Doc. No. 74.) As discussed above, Defendant owed
Plaintiff a duty to defend under the language of the Policy.
However, because there remains a question as to the extent of
Plaintiff's actual defense costs, the Court cannot grant
Plaintiff's motion for summary judgment relating to damages.
In conclusion, Plaintiff's motion for summary judgment will be
granted in part and denied in part, and Defendant's motion for
summary judgment will be granted in part and denied in part.
Defendant had a duty to defend Plaintiff in the Kaplan
arbitration under the Policy and Defendant breached this duty by
denying coverage. However, Defendant's liability to pay for
Plaintiff's defense costs is limited to Plaintiff's actual costs
not covered by the Zurich policy. The Court found no evidence
that Defendant acted with bad faith, as defined by the
Pennsylvania Bad Faith statute, 42 Pa. Cons. Stat. Ann. § 8371.
AND NOW this 7th day of June, 2005, upon consideration of
the cross motions for Summary Judgment, all responsive pleadings thereto, and the record as a
whole, for reasons set forth in the within memorandum, IT IS
HEREBY ORDERED THAT Plaintiff's Motion for Summary Judgment is
GRANTED in part and DENIED in part, as follows:
(1) JUDGMENT is ENTERED IN FAVOR of Plaintiff on
Count I of the Amended Complaint and AGAINST
Defendant. (Doc. No. 29.)
(2) The Court finds that Defendant had a duty to
defend Plaintiff in the Kaplan arbitration and
breached its Commercial General Liability policy in
refusing to reimburse Plaintiff for costs incurred in
defense of the Kaplan claims.
(3) In all other respects, Plaintiff's motion for
summary judgement is denied.
IT IS FURTHER ORDERED THAT Defendant's Motion for Summary
Judgment is GRANTED in part and DENIED in part, as follows:
(1) JUDGMENT is ENTERED IN FAVOR of Defendant and
AGAINST Plaintiff on Count II of the Amended
Complaint (Doc. No. 29.)
(2) Defendant's action did not constitute Bad Faith
under the Pennsylvania Bad Faith statute, 42 Pa.
Cons. Stat. Ann. § 8371.
(2) In all other respects, Defendant's motion for
summary judgment is denied.
Defendant's Objections to Evidence in Opposition to Plaintiff's
Motion for Summary Judgment are OVERRULED. (Doc. No. 89.) A
telephone status conference is scheduled for June 21, 2005 at
2:00 p.m. Plaintiff's counsel shall initiate this conference